Risk Management Reports

March, 2000

Volume 27, No. 3

Ben
and Jerry’s Conundrum

To whom are directors responsible? Should they devote their efforts
exclusively to increasing shareholder wealth, as some economists (and
some laws) argue, or should they be responsive to values delivered to
a broader range of stakeholders including customers, suppliers, employees,
and other communities that their organization serves?

The Ben & Jerry’s Homemade Inc. situation is a case study in risk management
conflict. This world-famous ice cream maker from Burlington, Vermont,
announced in December 1999 that it might consider potential buyers to
provide additional capital and fresh leadership. In early February 2000
it received one offer at a 28% premium on its stock price, and others
bidders may appear. Should the directors accept such an offer? This decision
is replete with risk. On the upside, current shareholders (including the
two founders and a third director, who together control 46% of the stock)
could see substantial capital gains. On the downside, many others could
lose. If the new owners shift some operations elsewhere, possibly to reduce
costs, employees in Vermont would lose jobs, local dairy owners who provide
300 million gallons of milk a year would lose sales, and the state would
lose visitors (the B&J factory attracts more visitors than any other site
in Vermont). Many charities might lose contributions from the 7.5% of
pre-tax profits that Ben & Jerry’s now donates, assuming the new owners
end this practice. Cost rationalization could also lead to a reduction
in the quality of the ice cream, affecting customers. The company could
cease being an emblem for the state.

These are important risk factors in the
decision process, but the lid to Pandora’s Box is no longer in place.
If the directors decline a bid, responding to the concerns of their broader
community of stakeholders, who desire the company to remain as it is in
Vermont, they could open themselves to lawsuits from angry minority shareholders
alleging that they were deprived of justified profits.If
they accept a bid, they could irretrievably alter the culture of a unique
company and economically injure many other stakeholders. These might not
have similar recourse to legal action but their inevitable recriminations
could affect Ben & Jerry’s reputation.

What should the directors do? Minority shareholders have rights, with
other stakeholders. Can an undeniably maverick corporation maintain its
unusual culture in the face of speculators whose interests are bottom-line
numbers, stock prices, and short-term rewards?

I believe that a candid and thorough risk analysis can play a part in
leading to a better decision, weighing the potential rewards and penalties,
and communicating them and the ultimate decision to the entire family
of Ben & Jerry’s stakeholders. Not everyone will be happy, but a sounder
future for this company will be assured.

At least the stock price jumped up after
the announcement of the bid. Investors who sold then have already reaped
a reward!